The latest revelations regarding covert data sharing practices by large tech companies demand governments finally take action to curb the unwanted exploitation of user data. To date, attention has been focused on privacy regulation; governments would be well served to look at tax policy, too. Digital taxes would better align taxation rights with value creation in the digital economy. They might also serve to communicate the growing frustration with abusive data management practices by the biggest offenders.
User activity is integral to many business models in the digital sphere. So why aren’t companies paying income tax in countries where those users are located, just like they would for any other source of value? The World Development Report 2019 looks at the unique challenges posed by digital businesses—platforms in particular are low on actual physical assets but generate large profits from data capital collected through user participation and user-generated content. These platforms rely on the active participation of users on one side of the market, and the collection, harvesting, and sale of the data generated by that participation on the other side of the market. The more user activity, the more data generated, which in turn increases potential profits. Without user activity, the model falls apart.
Some try to claim that the value of user data is too attenuated to justify imposing corporate taxes where users are located. But that argument is difficult to take seriously. Recent news makes clear that user data is of massive value, with companies trying to find more and more ways to share and monetize it. In Facebook’s case, data sharing agreements with dozens of other tech companies worked to drive-up Facebook’s membership, increase traffic, and advertising revenues. Alibaba, China faced intense criticism in early 2018 after customers discovered that Alipay, Alibaba’s online payment service, had not been forthcoming regarding sharing customer spending data with the company’s credit-scoring arm. In Kenya, Safaricom has come under fire for similar practices through its money-lending service M-Pesa.
Anyone still doubting the value of user data to big tech need only peruse the internal emails recently obtained by the UK government, which show Facebook executives have adopted a clear corporate agenda to profit however possible from user data.
The reality is that user data is a valuable commodity that exists due to the extent of user activity online, as well as government investments in ICT infrastructure, education and public health. Tax schemes in the digital economy should reflect that reality. Certainly, figuring out how user value creation fits within traditional taxation frameworks is theoretically challenging. It will occupy experts as part of the OECD base erosion and profit shifting initiative at least until 2020, by when a solution has been promised. But it’s clear that any common-sense approach to corporate taxation in the digital sphere must include some taxing rights for the countries from which user data is sourced.
Even acknowledging the value of user data, some liken its use to sourcing inputs from a third party -- except that here that “input” is provided voluntarily and for free, so should not be taxed. This argument rests on the notion that users make a choice to provide their data as part of a barter transaction: they willingly sign up to receive free services from online platforms, and in exchange they agree to give up their data. If they don’t like it, they can opt out. This is the same refrain we hear from big tech to avoid regulation.
But this argument is also out of date. Any choice that users have to avoid digital platforms and not supply them with their data is at best a Hobson’s choice. More and more of our everyday needs are fulfilled through the internet. Mobile wallets and shopping sites like Flipkart and Amazon track how we feed ourselves, what we choose to buy, and what we choose to read. Ride-sharing apps, GPS-enabled cars, and smartphones track where we go. And many products in internet of things are programmed to record our every word. It’s difficult to find much in our lives that doesn’t leave a digital footprint.
A tax also might be exactly what is needed given the current state of data privacy protections. While some regulatory efforts have been made – the General Data Protection Regulation in the EU and recent efforts in India to force digital companies to store Indian user data in-country are good examples – in the majority of countries privacy rules remain out of date. Taxing the profits from user data won’t prevent misconduct from occurring, but it may make companies think twice about how they harvest and use data in certain countries. The tax collected could in turn fund better research on the digital economy, more competitive salaries for public tech experts, and more robust oversight of digital business. And down the line, governments could use tax incentives to encourage compliance with whatever new rules on data privacy societies choose to develop.